The Plot Thickens in the Labor Market

Today’s weekly update on new jobless claims offers a reprieve on the darker visions conjured on these pages in recent weeks, including here. New filings for unemployment benefits dropped last week to by 29,000 to 469,000. Whew, that was a close one! But the risk for this series that we’ve been discussing lately is still with us, even if the latest report offers some breathing room for thinking positively.

The good news is that there was no follow-through on the recent rise in new jobless claims, at least not yet, as our chart below shows. The charitable interpretation, bolstered by today’s number, is that it was all a statistical quirk; a February fluke caused by the heavy snows last month. Or maybe it was the normal short-term volatility that tends to plague this dataset. But while there’s a slightly stronger case for arguing that jobless claims aren’t set to rise, there remains the more pressing question of when this series will resume falling?

It’s going to take weeks to answer that question. In the meantime, we’re left to wonder if jobless claims have hit a floor, temporary or otherwise. If that proves to be the case, that’s almost as troubling as watching claims rise because it would suggest that the labor market’s recovery, already weak if not feeble, may be facing more stress than previously realized.

Watching jobless claims, while hardly a silver bullet, is among the early warning signs of things to come. Recent history appears to back up the idea that initial claims offer a clue of what’s coming for the business cycle and the labor market. The fact that jobless claims were falling for much of last year was a sign that job destruction in nonfarm payrolls was slowing and that the GDP contraction had ended. That’s hardly unique to the present cycle, as we’ve discussed. The forward-looking ability in jobless claims is well understood in the dismal science, as noted, for instance, in a St. Louis Fed report from a few years ago. Meanwhile, economics professor Todd Koop explains in Recessions and Depressions,

Initial unemployment claims are more sensitive to changes in the business cycle than total unemployment. Unlike total unemployment, which lags peaks and troughs because of lags in the hiring process, initial unemployment claims are a leading indicator because firms anticipate changes in economic conditions and increase layoffs before production and decrease layoffs before conditions improve.

Where does that leave us with the latest numbers? Watching, waiting and worrying. Initial jobless claims appear to be at a crossroads. “Firing activity has largely tapered off, but new hiring has yet to pick up, Zach Pandl, an economist at Nomura Securities International, tells Reuters. That’s not inherently troubling, except when you consider the current context: an unusually long stretch of non-recovery in the labor market, i.e., job growth.

Ethan Harris, head of economics for North America at Bank of America/Merrill Lynch, opines in a Bloomberg TV interview that “we are in this limbo state where it is not clear if job growth has started yet.” But he’s hopeful and predicts that the limbo will give way to expansion, explaining: “Many companies say they over-reacted and fired a lot of people, more than they needed to, with the news of the recession. So, we’re expecting broad-based re-hiring.”

But the future is one thing, and the here and now is something else. At the moment, the labor market seems to be betwixt and between, neither contracting nor growing. The expectation is that expansion is near. We’ll learn in tomorrow’s jobs report for February if near is now.